Most countries experience inflation as a result of strong demand and limited supply. However, something different seems to be happening in Japan. According to one source (here) dairy farmers were pouring milk down the drain and slaughtering excess cows only two years ago. Demand for milk is not the problem, but the price of milk is too low.

What is happening in Japan now? Milk prices are not increasing, but the input costs for producing milk are increasing at a phenomenal rate. In other words, thanks to the world’s growing demand for beef and dairy products, U.S. policies concerning corn ethanol, and the Australian drought, the demand for grain products is driving up the cost of operating a dairy in Japan. Unfortunately, no one seems to be realizing that a business such as a dairy cannot operate at a negative profit margin.

Milk prices in Japan are not keeping up with increased production costs. The fact is, cows need forage to produce milk. For alfalfa, there is no substitute. A decent increase in milk prices right now will perhaps save Japan from an outrageous increase later if milk products become scarce.

Think about it… The cost of a butter shortage will have a bigger negative impact on Japan’s economy than to simply raise milk prices so farmers can afford to keep their dairies open.